S&P, Yen and Gold

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Sally Limantour
February 16, 2007

The risk appetite is increasing in the financial markets and the shortest term indicators are now back at high levels. Consequently, my short term model is back to a sell signal. There was a notable short covering of put options yesterday and the 3 day put to call ratio is also moving back towards a sell. Closing long positions today ahead of the 3 day weekend and will execute short positions with a stop loss of about 1% above current levels between today and Tuesday.

The monthly capital flow report from the Treasury yesterday showed a net portfolio inflow of only $15.6 billion in December versus the “norm of $50-80 billion (Nov. was 84 billion). This is due to record net outflow of foreign investment from US equities and record US investment in foreign securities, according to Bank of NY economist, Woolfolk.

The Yen moved higher against every currency and the probability a rate hike at next week’s BoJ policy meeting is growing. The question is if the BoJ yields to foreign pressure, thereby raising rates, will the whole carry trade unwind and if so, will it be orderly? The Carry Trade was covered here on my February 4th post. The last time we saw an unwind was the summer of ’98 when the carry trade ended violently and some are concerned given the size of the short position today we could witness a protracted and painful event. This must be monitored closely. The BoJ members are in a “blackout” mode ahead of the policy meeting next Tues/Wed., so we will not hear policy statements until after this time.

Gold has formidable resistance between $668-674. Gold is trading lower this morning and next support for April gold is 663. Many cycle folks are writing about a cycle high due at the end of February. Perhaps if the market continues to reject closes over the 672 area we will go back and test the low 650’s. The real action of late is in the base metals, particularly nickel which rose 5.4% yesterday due to tight supplies. Nickel is up 22.3% for the year, versus copper which is down 7.2% year-to-date. There are a number of attractive companies to look at in the base metals sector.